Could Leeb’s “Sinclair Oil” Help You Pocket $150,000?

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This article originally ran just over a year ago, when the stock being teased was around $18 — it rose to about $22 over the Summer, then collapsed with almost every other energy stock over the last couple of months and is now trading around $11, with an indicated yield of about 18%. The stock has fallen more than 20% in just the last few days, though this morning it seems to have bounced back a little bit.

We poke this one up to the top of the pile for your attention because Stephen Leeb is touting this again as as buyout candidate and a high-yielder, and the ad that many readers have been asking about is essentially the same as it was a year ago. Our article below is also unchanged, though we’ll add a few new notes at the bottom for those who are interested. Enjoy!

—from 11/5/13—

If you read only investment newsletter pitches, you could be forgiven for believing that energy companies and biotech stocks make up the entirety of the investing universe — that’s where you can imagine riches flowing instantly from something exciting, without having to picture a company becoming a regular ol’ blue chip manufacturer or tech company or compounding earnings for decades from selling uniforms or hot dogs or whatever else.

And oil and gas and other energy stocks are obviously sometimes great investments — it is a big sector, with things like oil prices having a big influence on marginal spending among consumers in the US and with, bigger picture, something in the range of 8-10% of global GDP being associated with energy expenditures of one sort or another.

So keep that in mind … even though it sometimes seems like half the stocks we write about are oil-related, don’t let your mind drift into thinking that this one sector should take up a huge chunk of your brain or your portfolio.

But, um, today we’re writing about another oil stock. Just like yesterday. Which brings us to five or six of ’em in the last dozen articles. They’re all different kinds of stocks, of course, and we try to follow up on the ideas that we’re asked about most often, so let’s get to it.

This time around it’s Dr. Stephen Leeb, who’s telling us that Sinclair Oil could end up helping us “pocket over $150,000 in 2014.”

And no, he’s not telling us to invest in Sinclair Oil — that’s a private company, one of the largest private companies in America — he’s telling us that Sinclair might be interested in buying out the stock Leeb likes.

Oh, and it pays a big ol’ dividend, too, of “nearly 11%.”

So who is it? Let’s check out the clues …

“Driving through Wyoming, the only question in my mind was which oil company would end up becoming the massive home run, the Peter Lynch 30-bagger type winner. The answer was easy. The cattle ranchers in Wyoming all identified one company signing leases all along Little Goose Creek.

“In fact, this one company has snatched up leases to over 218,000 valuable acres within oil-rich Green River, Big Horn and Powder River Basins in Wyoming.

“The company now controls 964 productive wells across Wyoming. Total net production increased this August to a record 2.45 million barrels per day. That’s up a whopping 26% over the second quarter….

“Best of all, this Wyoming Wildcatter is structured as a Master Limited Partnership (MLP). This means you may pay absolutely zero taxes on investment gains and dividend checks in your mailbox.

“You’ll pocket a whopping dividend yield of nearly 11%. That’s right; the company has increased their dividend payout to investors for 16 consecutive quarters and counting!”

And Leeb says that “the word across Wyoming” is that Sinclair is looking to control more reserves in the area, partly because they have two Wyoming refineries, but that there could be other suitors as well, including the Guggenheims, who he says just bought a stake in “my top-secret Wyoming Wildcatter.”

Which really ought to be enough clues, no?

This is clearly one of the class of “producing MLPs”, a group that was very small until a few years ago and now numbers 20 or so — these are master limited partnerships, similar in structure to the more well-known MLPs that own pipelines and midstream processing plants and tend to have very steady, fee-based, capital-intensive businesses that lend themselves to high cash payouts but different in that instead of being a “toll road” or a processor of energy products, they actually produce oil and gas. That obviously makes their business more highly variable, but they do generally hedge to help maintain payment schedules, and they generally own long-lived, steady and boring producing oil and gas fields without a lot of execution or exploration risk.

They own depleting assets, though unlike the oil trusts that have also cropped up in recent years they have some flexibility in buying and selling assets or investing in their projects — trusts are more passive, they just get a cut from a specific field for a set period of time, MLPs can be more active in replenishing assets or changing plans or priorities along the way. In most cases the producing MLPs focus on trying to buy steady, producing oil fields from the exploration companies who would rather have cash now (so they can explore somewhere else, or grow in some other way) than wait for all the cash to come in from future oil sales over years or decades.

But which one is it? Thinkolator sez this is: Breitburn Energy Partners (BBEP)

Which is indeed one of the higher-yielding producing MLPs, with a current yield of just about 10%. Their next earnings announcement is tomorrow, by the way, so do note that it might be a little bit bumpy. Hopefully not as bumpy as it was back in the Summer, when accounting concerns about Linn Energy (LINE), another producing MLP, drove BBEP prices down by about 10% in the blink of an eye (LINE’s shares fell much more sharply, of course, down about 25%).

I have no idea whether or not BBEP will become an acquisition target, by Sinclair or anyone else, in 2014 as Leeb asserts — but it does have that fat distribution payment that keeps investors excited, and they have managed some acquisitions in recent years to keep their production levels up.

And Wyoming is one of their important production areas, with (as teased) 964 productive wells, though they’re also active in several other basins. You can see a broader picture of their business in this recent presentation to an investment conference. They have indeed been a consistent distribution raiser — they’ve lifted the distribution each quarter for 13 quarters in a row (not quite 16 as was teased — they slashed the dividend by about 25% during the financial crisis, when oil prices cratered).

That puts a strong onus on the company to keep it up — if they announce a quarter without a dividend increase, I would expect to see some selling pressure. Presumably future payments will be dependent largely on oil and gas prices (their Wyoming properties are about 50/50 oil and natural gas, though the rest of their portfolio is more oil-heavy), and to some degree on interest rates (they’ve been borrowing money to make most of their acquisitions, though they also do issue new shares with some regularity).

I generally prefer the producing MLPs to the oil trusts, in large part because they’re more active and flexible, but I don’t know a lot about Breitburn specifically and haven’t owned this one personally. It was also a pick from Roger Conrad’s Big Yield Hunting service about two years ago, when it was also yielding about 10% — over that time it has mostly bounced around in the $17-20 neighborhood, with some big swings on sentiment about MLPs in general (as when tax fears came up regarding the sector, or when Linn’s accounting debate hit the wires this Summer) or about oil prices, but most of the time it seems like BBEP “wants” to be a fairly aggressive, levered, 10% yielding MLP. I find it hard to picture a world in which you get 50% capital gains from a stock like this in a year unless oil or gas prices shoot much higher, but it’s certainly feasible that they can keep doing what they’re doing … and a 10% yield ain’t bad.

That’s not so say I think you should rush out and buy it, of course — that’s your choice to make, and hopefully you’ll know more about the stock than I do before you make that decision. There are several other producing MLPs available, the Dividend Detective has a good list here and most of them currently carry yields of between 8-10%.

Got a favorite high-yielder you want to share with the gang? Shout it out with a comment below.

P.S. Oh, I almost forgot — no, it’s not a “wildcatter.” Wildcatters drill oil wells in new areas with a hope and a prayer, producing MLPs try to buy up very proven, long-lived reserves in established producing areas and do just boring infill drilling and optimization of existing wells. But, of course, “Wyoming Wildcatter” sounds a little sexier than “long-lived reserves levered by debt and optimized for cash flow to unitholders.” And yes, this is a MLP so the usual MLP-specific questions will probably come up — MLPs generate a lot of tax-deferred income because of their depletion and depreciation expenses, but they aren’t tax-free and they do require some additional recordkeeping and tax filing, and anyone buying MLPs should be careful to note whether they’re more appropriate for your taxable or tax-deferred accounts. And no, I don’t know what the tax implications are for non-US investors in these publicly traded partnerships, but you do buy and sell them exactly the same way you buy and sell stocks.

——back to December 2014—–

BBEP has been growing during these tumultuous times for the oil producers — they just acquired another producer and also just raised their monthly dividend again, probably largely because, like other producing MLPs, they have some short-term protection from their commodity price hedging program.

You can see Breitburn’s current hedging summary here, it looks like they have hedged (that is, effectively pre-sold) about 70% of their 2015 production at an average of $93.50 for oil and $5 per btu for natural gas — so if we assume that their production will continue as expected, they should likely be in decent shape and able to continue their dividend for the next year. The hedges drop down pretty sharply both in price and in percentage of production for the following years, but are still meaningful — particularly if oil stays at such depressed prices in the $60s or drops still further.

Their recent acquisition of QR Energy, which closed just recently, is more akin to a merger that balloons the size of the company, but it didn’t cost them cash — this was a unit-for-unit acquisition, so although they agreed to the price at the top of the market they shouldn’t be hurting from the deal. If you think that oil comes back pretty solidly within the next 6-12 months, then this is an interesting way to play that — their commodity price hedges should give some backstop to the dividend, which is currently huge, as long as oil doesn’t remain at these prices well into next year, when we start to worry more about their much smaller 2016 hedges.

Oh, and Leeb is also now calling this a buy in part because the Guggenheim family funds “just bought a stake” — Guggenheim Capital does indeed own a small position in Breitburn Energy Partners, but they own shares of hundreds of companies and this position is pretty trivial in their portfolio. They’ve held for at least a few quarters (I didn’t check their 13F filings going back that far) and have steadily increased the position, but it’s still very small. I’d say the Guggenheim ownership means nothing, other than the fact that the name is recognizable and catches your attention in Leeb’s ad.

So what do you think? Looking for a high-dividend oil and gas producer with some decent hedging? Think Breitburn fits the bill? Let us know with a comment below (and yes, we’ve kept the few original comments below so they aren’t lost to the ages).

After dropping oil prices and consequently the share prices, with today’s price of BBEP, the dividend is 15.75%. Recently the BBEP stock price has dropped a lot. I own the stock strictly for the dividend and I was about to sell it a couple of weeks ago around $17. However, I thought that they are more on gas and hydrocarbon liquids. Therefore, the oil prices should not affect them drastically. Mr. Gumshoe, am I right in saying that the companies like BBEP, LINE and CHK will recover very fast? Thus, if BBEP goes to $17 soon, I won’t be surprised.… Read more »

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advantedges

December 2, 2014 8:12 pm

The concept of Dividend Cuts needs to be discussed here, especially by Travis. Already several companies have felt the squeeze on their profit margins and budgets, and now they are having to adjust their dividend payments accordingly. SeaDrill was one of the first to announce the cut to its dividend. From Morningstar, The Headline was SEADRILL DROPS A BOMBSHELL ON INVESTORS: “Seadrill’s third-quarter earnings were disappointing, but were overshadowed by the company’s announcement that it will immediately suspend its dividend in favor of stock repurchases and debt reduction. While we think this is the fiscally responsible choice by management as… Read more »

I assume all those names would recover fairly quickly if energy prices rebound, but I’ve been blindsided by the extent of the fall in oil prices so I have no reason to make a macro call on whether oil will rebound. NGLs generally price a bit more like oil than like gas, which was a big positive in recent years but not so much right now.

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Dick

November 5, 2013 3:56 pm

BBEP I think is correct. At least the number of wells in Wyoming as per their website is exactly the same as in Leeb’s prose. I’m long BBEP and don’t complain, so far.

The production numbers are absurdly incorrect. If the production was 2.45 million barrels per day , the amount of money at $90 oil would be roughly $200 million per day. I own Breitburn shares and wish this error was correct.

You’re right, Steve — sorry, I just checked that it was a match to published reports and didn’t actually check the reality of the numbers. The LA Times article cited (wrongly) the “2.45 million barrels of oil equivalent (boe) per day” number, and I presume that’s where Leeb’s copywriter got some of his stuff (other quotes from the pitch seem inspired by that article too), but the actual number is, as you note, 2.45 million barrels of oil equivalent for the quarter. Average production as of the last quarter was just under 30,000 boe/day.

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george

November 5, 2013 6:03 pm

It is however a sign as to the level of confidence one should have in Leeb (or his copywriters), in that they apparently are boasting about this company, and never bothered to look up the data with the company itself. Think they really know much about this company at all? Or did they just pick a random news article and run with it?

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Jim Hasak

November 5, 2013 6:07 pm

When I got the Leeb ad last week, I did a little sleuthing of my own and came up with Breitburn also, and decided to pick up some shares. Not betting the farm, but the fundies look good and the yield looks relatively safe to me.

I followed Leeb a little bit several years ago. He always appeared to imply that he was the smartest person in the room, and at that time invested a lot of reputation and ink around the concept of peak oil. Obviously, he was dead wrong on that, so not sure how much to believe him now.

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John Lincks

November 5, 2013 7:24 pm

I am long Breitburn too. Currently priced @ a 3% discount to assets/reserves per Stansberry’s weekly monitor which posted today. Goes ex-dividend tomorrow so good chance to pick up shares at a better price in the next few days.

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Kevin

November 5, 2013 8:02 pm

Why not sell covered puts to get an even lower price? I will probably watch what happens tomorrow when the stock goes ex div.

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Wim van der Loo

November 7, 2013 4:49 am

Sell covered puts?

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Irregular

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jay_

November 11, 2013 10:02 pm

cash covered.

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Charles T Corwin

November 6, 2013 3:15 pm

I checked on the company message board. It appears the wells are in a sharp decline {normal for older wells} They seem to be hanging their hat on the opening of fracking in Cal., yet the actual bill signed by Jerry Brown turns the process over to an enviornmental group for their okay. Knowing the mentality of the tree huggers in Ca, I would not hold my breeath waiting for their approval!

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wYOMINGITE

November 14, 2013 5:12 pm

As someone in the know how of Wyoming’s Oil and Gas industry, I agree with Charles Corwin. Breitburn is drilling very few wells in Wyoming, and the acreages that they hold are in depleted fields scattered around the state. They are not active in the Niobrara play in central Wyoming and the Powder River Basin where most of the active is going on. Their seismic shoot was a small project in Niobrara County, Wyoming in a depleted field. There are better bets, such as Chesapeake, which is a buy out candidate as well.

They could cut the current dividend in half and still get 8% at todays market price. Their income before tax is at least breakeven the last 3 years and their cash flow from operations easily covers the dividend for the last 3 years. The oil price scare has created a buying opportunity in my opinion. For those with risk investment money, I think it’s a good bet. I don’t see oil prices much lower because the costs of production and operations will decrease future production unless oil prices are profitable. Low oil prices will reduce excess inventory, which will lead… Read more »

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advantedges

December 2, 2014 8:17 pm

The concern we all have to have is that they will cut the dividend entirely, which is what SDRL did. Careful out there, folks.

Looking for some Gumshoe readers wisdom. I was looking at the preferred shares for BBEP (BBEPP). Having a hard time understanding peferred’s. I know they can be recalled at 25 par. I know the ones that are cumulative have a responsibility to pay you the past dividend if they halt it for some reason. What I do not get or really fully understand is the risk. For example is a company like Breitburn was bought, would the newer company have the same responsibilities? What is they went into bankruptcy? I know they are behind bonds/debt in the get paid line,… Read more »

The preferreds should continue to exist and earn if the company is bought out by someone else, though sometimes there’s a provision for buying the preferreds out (hopefully at par) in the event of a change of control. The real risk reduction is the combination of the dividend’s cumulative status and their position ahead of common equity in the event of a bankruptcy. You can’t really tell what would happen in the event of bankruptcy, but if there are enough assets to satisfy the bondholders and have some left over then the preferreds would get paid — perhaps as much… Read more »

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quincy adams

December 2, 2014 8:39 pm

Maybe one reason the producing MLPs are shunned by institutional investors is that they are less easily swayed by the snake oil, er, I mean shale oil salesmen. Many of the producers are suffering from declining wellhead pressures with a reduction in output per well, so must keep drilling more wells just to keep output on an even keel. Even if they are hedged for the near term, they are locked in a price war they cannot win. I’ve sold off everything except ETP, a long time holding of mine, which has pipelines in roughly 40 states. As long as… Read more »

AHN – Anworth Mortgage Asset Corp The SP recently moved up over the 20, 50, and 200 day MA. The last price was $5.15, it has a 10.4 % yield, and Zack’s rates it as a buy. Also, according to MarketEdge: “The stock is a buy. Moving Average Convergence/Divergence (MACD) indicates a Bullish Trend.Chart pattern indicates a Strong Upward Trend. Relative Strength is Bullish. Up/Down volume pattern indicates that the stock is under Accumulation. The 50 day Moving Average is rising which is Bullish. The 200 day Moving Average is rising which is Bullish. Look for Support at 4.75. Price… Read more »

I’ve owned BBEP twice and was very happy with it. I managed to sell the second time last summer near the peak and made a nice profit. But given the issues, pointed out by other commenters, I would be wary at this point. Wait to see how the oil bear market shakes out first — it’s far from over.

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philippe

December 3, 2014 2:49 am

Breitburn is a derivative oil play. If they indeed hedged production through 2015, they should be OK in maintaining the dividend, the Saudis cant keep oil prices this low for more than a year or two–they will start to eat capital reserves while feeding their people. We may see 6-18 months of low prices (enough to cause a lot of pain in Iran, Venezuela, Nigeria, parts of the US, etc) but not for a very prolonged period of time–think 3 years–so an 18 month hedge should leave the distribution (assuming wells dont run dry) intact.

It means that, through swaps and futures contracts, they’ve effectively “pre-sold” roughly 70% of their expected 2015 production, in this case at about $93 a barrel (I think that price is correct, would have to check their presentation for specifics). Most producing MLPs do this, because they need to have predictable cash flow to support the dividend and they don’t want to have to cut distributions if next year’s price ends up being lower — though it doesn’t usually work out as dramatically as it is for them right this moment, because oil doesn’t usually drop 20-30% in a month.

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joseph Pickeing

December 3, 2014 4:07 pm

The pumping by the saudis is the same game that they played in the 80’s when they forced it down to $9 causing the collapse of the ussr not star wars . The agreement between US & saudis now is we attack isis while they drop the price of oil. But they are also trying to kill fracking as it is the major threat to their power not russia They were sucessful then this time they will fail with hand cuffing of the obama adminstration energy policies by a republican congress that is more pro energy

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Kma

December 5, 2014 8:57 pm

I am hopeful for a rebound in the stock price next week, but slightly on edge now. When does this jump back to the teens? All the fundamentals seem to be right for BBEP.

And now BBEP announces they’ll file for bankruptcy protection… like many of the other producing MLPs (all of which have had two terrible years with oil’s slide), this was a favorite of several of the high-yield-focused newsletters.

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